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04

Costly risk

Open-access content Tuesday 1st April 2014 — updated 4.50pm, Tuesday 14th April 2020
2

I wanted to pick up on a couple of themes highlighted by Peter Shellswell's letter (The Actuary, March 2014). 

An economic valuation is the best way for companies to understand the value and sustainability of promised benefits - you cannot reduce this cost by increasing risk. The substantial deficits of US public sector pensions (and in particular the plight of bankrupt Detroit) shows the impact of assuming that optimistic future investment returns will come to the rescue of poorly funded schemes, albeit that the private sector commercial considerations are compounded by legal restrictions, unions and political denial.

The debt burden acquired before the credit bust will cast a long shadow over the pace of recovery and the Bank of England has commented that future equilibrium interest rates are likely to be lower than in the past as elements of unconventional monetary policy perhaps become part of the 'new normal'. Future growth is also likely to be limited by the lack of political will to carry out liberalising structural reforms and the ageing of the population in developed economies. For those that believe in Larry Summers' 'secular stagnation', it would be wise not to expect too much from future stock market returns in the developed world.

Neil Speight 11 March

The editor welcomes readers' letters but reserves the right to edit them for publication. Please email [email protected]. The deadline for receiving letters for the May issue is 14 April 2014. 

This article appeared in our April 2014 issue of The Actuary.
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